The Role of the Store - 8 July 2013

The Role of the Store

The Changing Role of the Store with Channel Convergence

7/8/2013

By Lora Cecere Founder and CEO

Supply Chain Insights LLC

Copyright © 2013 Supply Chain Insights LLC Page 1

Contents Research ........................................................................................................................................................... 2

Disclosure.......................................................................................................................................................... 3

Executive Overview ........................................................................................................................................... 4

Today’s Store ..................................................................................................................................................... 5

Shift in Sales by Channel ............................................................................................................................... 5

Productivity Gains for Manufacturers but not for Retailers .............................................................................. 7

Amazon’s Impact ............................................................................................................................................... 8

Retail Convergence ........................................................................................................................................... 9

Challenge with Today’s Operations .............................................................................................................. 13

The Opportunity ............................................................................................................................................... 15

Recommendations ........................................................................................................................................... 17

Conclusion....................................................................................................................................................... 18

Appendix ......................................................................................................................................................... 19

Other Related Reports ..................................................................................................................................... 21

About Supply Chain Insights LLC .................................................................................................................... 22

About Lora Cecere .......................................................................................................................................... 22


Research Power is shifting to the shopper. Channels are converging. Retail is changed. Formats have morphed.

Retailers want to improve the productivity of their operations, but they are struggling. Overall progress is

stalled. The top of mind question for many retailers is “How should they adapt? What should be the Role of the

Store?”

This report is designed to help. It is based on a combination of quantitative research results, analysis of retail

balance sheet data and interviews with major retailers. The goal of this report is to share insights on how

retailers are adapting to these macro trends.

At the center of this report is a quantitative study. This research study was conducted online among retailers

from August, 2012 through May, 2013. The study overview is outlined in figure 1. For more detailed respondent

demographics, reference the additional charts in the Appendix.

Figure 1. Overview of the Role of the Store Study

Retail is not retail. There is little in common between grocery, mass merchant and specialty retail. It is for this

reason that the reported results in this study are never grouped together. To better understand the trends, the

research in this report is plotted with distinction between the three retailer types.


This study focuses on United States retail. Retail is a fragmented industry with many regional players. While

some respondents in this study may have a global presence, the study should not be construed as a multi-

national study.

Disclosure As an independent analyst firm, your trust is important to us. In conducting research, we are open and

transparent about our financial relationships and our research processes. This report was 100% funded by

Supply Chain Insights.

As a company, we are committed to sharing Open Content research. These reports are intended for you to

read, share and use to improve your supply chain decisions. Please share this data freely within your company

and across your industry. As you do this, all we ask for in return is attribution. We publish under the Creative

Commons License Attribution-Noncommercial-Share Alike 3.0 United States and you will find our citation policy

here.

http://creativecommons.org/licenses/by-nc-sa/3.0/us/

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Executive Overview At one time, the physical store defined the retailer. It was the brand. Today, this has changed. Now the store is

a part of a cross-channel experience. It is a combination of goods and services. The impact of the change is

different by retail sector, but it is pervasive.

While changes in other industries have happened incrementally through continuous improvement and process

innovation, retail has been transformed by new business models. The pace is faster and the customer

demands higher.

Redefining the role of the store is critical. It requires partnerships of both retailers and manufacturers. It is for

this reason that we wrote this report.


Today’s Store The store is the retailer’s largest investment. It is about the effective use of labor. As will be seen in this

research, retailers are struggling to deliver consistent operations and combat issues with employee turnover,

talent management and training.

In other industries, improved connectivity, progress in Informational Technology (IT), and process

improvements drove improvements in productivity, but this is not the case in retail. While retailers, over the

course of the last decade, have attempted to improve productivity through all of these means, progress is

stalled.

Concurrent with the pressure to improve operations is the need to drive channel convergence and integrate

store operations into multi-channel retailing. With the evolution of social, mobile and e-commerce technologies,

this is an ever-changing goal. Five years ago, “multichannel” had an entirely different definition than it does

today, or will have in another five years. The technologies and the needs of consumers are changing too

quickly.

The focus needs to be outside-in. It needs to start with the shopper and redefining the shopping experience.

Then, and only then, can it be about redefining the role of the store. For many retailers, steeped in tradition,

this is a challenge. Channels are managed in isolation and digital programs are a subset of the marketing

organization. However, the need is urgent, because the pace of business disruption and technology adoption is

happening faster in retail than in other industries.

At the heart of the issue for retail is the definition of the store with this ever-changing set of expectations. To

help, in this report we share insights from our quantitative analysis, financial balance sheet review, and

interviews with major retailers.

Shift in Sales by Channel E-commerce is a more profitable model than brick-and-mortar retailing. An online retailer has endless aisles

with an ever-changing mix of products and services. As shown in figure 2, the growth in e-commerce sales is

making it harder to compete in the traditional brick-and-mortar store format.

Sales are shifting from conventional brick-and-mortar stores to e-commerce channels. As more sales happen

in the e-commerce channels, retailers are saddled with trying to improve the productivity of traditional store

assets. E-commerce channels have siphoned off the most profitable sales.

While other industries have improved revenue per employee, overall productivity in retail is stalled. Instead,

there is a shifting in sales to more profitable channels. This is happening at a time when customers are asking

for improvements in service that require channel convergence.


Figure 2. Productivity by Type of Retailer

Table 1. Store Productivity


In table 1, when we examine specific retailer leaders by category, we can see that year-over-year progress in

productivity has been a tough slog. When there is a change in store format (like Costco with the redefinition of

format into a club store environment) or a shift to greater e-commerce (retail specialty stores), the greatest

improvement in labor productivity happens.

Productivity Gains for Manufacturers but not for Retailers In contrast, in other industries, as shown in tables 2 and 3, productivity over the course of the last decade

improved. This was a combination of improvements in IT, global expansion and process innovation. With the

introduction of e-commerce, and the proliferation of channels, retailers have been unable to gain these

productivity benefits. While manufacturers have converted these improvements into new marketing efforts and

investments in new products, retailers are caught in a Catch-22.

Tables 2. Industry Productivity over the Course of the Last Decade

Tables 3. Industry Productivity over the Course of the Last Decade (Retail)


Amazon’s Impact The evolution of new business models, like Amazon.com, is a disruptor. With the introduction of Amazon Prime

with free shipping and the growth of categories, many would ask, “Why does a customer need to enter a

physical store?”

Amazon, now with $61 billion in sales, has had a pervasive impact on retail. The company is forecasted to be

the second largest retailer behind Wal-Mart Stores, Inc. at $75 billion in sales in 2014. The company clearly

understands the role of supply chain using new fulfillment models to thwart competition. Amazon’s fulfillment

costs are estimated to be 13.5% of sales, and Wall Street investors have allowed Amazon to experiment with

new models in logistics and fulfillment. 1

The growth effect is pervasive. With the Amazon effect, no channel is sacred. Ten years ago, Amazon was an

online book retailer; today a family can buy almost everything that a household needs from Amazon.com. The

average consumer products company now has 2% of sales represented by Amazon. The company has

aggressively attacked the center store (dry goods) of conventional retail, and is now beginning an attack on

perishables. The company is now rolling out AmazonFresh, an online grocery service, as a test in Los Angeles

and Seattle in 2013.

To understand the pervasive nature of this change, consider Amazon’s 2012 announcements:

“We now have more than 15 million items in Amazon Prime, this is up 15x since we launched in 2005. Prime

Instant Video selection tripled in just over a year to more than 38,000 movies and TV episodes. The Kindle

Owners’ Lending Library has also more than tripled to over 300,000 books, including an investment of millions

of dollars to make the entire Harry Potter series available as part of that selection.” 2012 Annual Report

“On average, our high inventory velocity means we generally collect from consumers before our payments to

suppliers come due. Inventory turnover was 9, 10 and 11 for 2012, 2011, and 2012.” 2012 10-K

Competitor Wal-Mart Stores, Inc. is in a vice. It is sandwiched between “dollar stores” for the customer

seeking value and the impact of Amazon for the shopper looking for both price and convenience. Note the

impact on Walmart in their annual report announcements:

“Growth in the United States will come from additional penetration into more metropolitan markets, as well as

from new formats and stronger integration with the online business. Walmart.com traffic exceeded one billion

visits this past year, growing more than 15 percent over the previous year through Site-to-Store™ and home

delivery.” 2010 Annual Report:

1 Amazon’s Rising Fulfillment Costs, Supply Chain Digest, June 6, 2013


“E-commerce gives us a great opportunity to bring “anytime, anywhere” access to millions of customers around

the globe. We’re further strengthening our Global e-commerce business by investing in new talent and

technology. We’re investing in people and capabilities. We plan to continue our investments to leverage

additional opportunities in e-commerce. This year, pending government approval, we plan to increase our

investment to 51 percent in Yihaodian, a fast-growing e-commerce website in China.” 2012 Annual report

Retail Convergence For the retailer, change is the new normal. Channel proliferation abounds. Power has shifted to the shopper.

They want products where and when they want them. The dependency on alternate channels—e-commerce,

mobile and social commerce—is high. It is higher on impulse items from mass merchant retailers and specialty

chains. It has had less of an impact on grocery retail.

Numbers of stores are growing. Despite the struggle for productivity, based on annual reports, 42% of

grocery retailers are adding more than 10% to their store count in 2013, and the store formats are bigger.

Similarly, 46% of mass merchant retailers are adding more than 10% to store count in 2013i.

Consistent with the annual reports, in this quantitative survey (see figure 3), 59% of grocery retailers and 51%

of mass merchants report increasing the count of their physical brick and mortar stores.

Figure 3. Expected Change in Number of Physical Stores


There is a belief that stores are both important and have a gap in performance. Despite the growth in e-

commerce, retailers in the survey (see figure 4) believe that the physical store is important. Specialty retailers

rate store performance slightly higher than do grocery and mass retailers.

Figure 4. Importance versus Performance of Physical Stores

Figure 5. Operating Channels


Figure 6. Expected Percent of Revenue by Channel

Business is more complex. Channels are proliferating. As shown in figures 5 and 6, survey respondents

report an increase in channel proliferation, but the majority of sales are still happening in brick-and-mortar store

formats. There is a need to master channel convergence and use the stores to drive differentiated shopping

experiences.

A challenge common to all of the retailers is the challenge of the store. Retailers are fighting rising labor prices

and employee turnover. They are attempting to improve the consistency in store operations, but it is a tough

slog.

The impact on each retail sector is slightly different. While grocery is fighting issues of price management and

differentiated merchandising, the mass merchant and specialty stores are struggling to a greater degree with

“show rooming” and the issues of channel convergence.


Figure 7. Top Three Physical Store Challenges by Type of Retail

In the words of Target in their 2012 Annual Report, “Today, the shopping experience we offer our guests

extends well beyond the walls of our stores—to our Target mobile apps and Target.com. And for a society

that is increasingly online and on-the-go, that engagement includes social media. Not only do channels like

Facebook and Twitter allow us to connect with guests and provide them with great deals, but they also

create a two-way dialogue to help us make their Target experience the best it can be. By leveraging

innovative technologies, we are delivering highly relevant and differentiated shopping solutions that are

personal, simple, and accessible—anywhere, anytime.” Target is also attempting to drive channel

coalescence.

Throughout 2012, we accelerated our investment in our digital channels and began focusing on thoughtful

integration of our digital and store experiences to meet our guests’ ever-changing needs. For example, we

launched free Wi-Fi in all stores, making it easier for guests to access digital tools and services, like the

Target app and our QR code programs, to inform their in-store shopping decisions. We’re finding new ways

for guests to shop, through social shopping programs like Give With Friends, and we’re testing, and

learning from, innovative new technologies like our buzzed-about shoppable short film that brought our fall

marketing campaign to life. Our continued enhancements to mobile technologies and in-store digital

campaigns, like Target’s Top Toys, earned us Mobile Marketer’s 2012 “Mobile Commerce Program of the


Year,” and underscore our commitment to deliver a seamless, relevant, personalized experience for our

guests across all channels.”

There is a need to adapt. Most retailers operate individual channels separately; yet the shopper wants one

“experience.” The issues and current business pain of the retailer abound. As shown in figure 8, today the store

plays an important role in delivering a “localized assortment” and facilitating returns. In the future, based on our

interviews with retailers, it will be more about delivering brand-differentiating services and the collection of

demand insights.

Figure 8. The Role of the “Physical Store”

Challenge with Today’s Operations The need to rethink the role of the store is happening at the same time that most retailers are facing issues in

improving operations. While unemployment in many regions of the country is high, as shown in figure 9,

retailers are facing issues with labor. In our survey, employee training, retention and labor turnover are hot

issues for the retailer in order to fulfill the role of the store.


Figure 9. Retail Challenges

Figure 10. Efforts to Combat Employee Turnover


Labor turnover is over 30% in grocery and mass merchant operations, and retailers are struggling to stabilize

store operations in the face of increasing complexity at the store. Consumer products companies can help to

partner with retailers to be sure that products scan in the store, in-store programs are easy to manage, and

trade-promotion and shelf programs are easily administered. Retailers are also eager to push labor costs to the

manufacturers looking for help for store resets, new product store merchandising and in-store audits. Due to

the issues with consistency in store operations, taking on some of these responsibilities might serve the

manufacturer well.

The Opportunity The opportunity for brick-and-mortar is different by sector. For grocery, as shown in figure 11, the largest

opportunity is in delivering differentiated services and harvesting demand insights.

Figure 11: Role of the Store for Grocery

For mass merchants, as shown in figure 12, the greatest opportunity lies in offering localized assortment. Many

mass merchants are working on the “store of the community” where products and services are based on social

input and community needs. We are also seeing the rise in collaborative commerce (the sharing of items on a

rental basis).


Figure 12. Role of the Store for Mass Merchants

Figure 13. Role of the Store for Specialty


In contrast, for the specialty retailer, as shown in figure 13, it is all about redefining demand insights through

cross-channel data collection and the harvesting/translation of demand data across the supply chain. These

stores often have long supply chains with push-based replenishment and allocation. As a result, the use of

demand insights, and more timely translation of consumer preferences through cross-channel test and learn

programs, is a great opportunity.

Recommendations The changing dynamics in retail, and the role of the store, need to drive the changes in the consumer value

chain and the redefinition of the shopping experience. Here are some recommendations based on our

interviews with clients:

For the retailer, it starts with the definition of the store from the consumer back. Evaluate how channel

convergence and the changing models of retail are impacting the store. Think creatively about how to drive

traffic and increase baskets within the store through brand-building experiences. These need to be

opportunities that cannot be offered through e-commerce. It is usually a combination of products and services.

It looks different by store format:

• For Walgreens, it has been the inclusion of clinics, staffed by physicians, for well-patient visits. This

enables the quick pick up of prescriptions and other over-the-counter remedies for family health issues.

• At Home Depot, it is do-it-yourself classes for home decorating with the rental of do-it-yourself tools.

The foot traffic is driven by the expertise of the in-store education programs.

• For Ralph’s, a grocery retailer, it is center-store cooking classes. These are usually based on health

and wellness. The grocer is recognizing that a barrier to center-store sales is the consumer’s

knowledge of cooking.

• At Godiva, it was the introduction of a chocolate fresh fruit dipping bar that increased both in-store

traffic and baskets. The consumer wanted and desired a specialized experience combining both fresh

fruit and chocolate.

• For pet stores, like Petco and Petsmart, it has been the addition of a line of in-store grooming and

veterinarian services.

For the consumer products company servicing retail, it is about helping the retailer to do different better. The

retailer wants help. They are tired of driving foot traffic with large “Buy one, get one free!” promotions (often

termed BOGO) that primarily benefit the manufacturer but result in small basket sizes for the retailer. Instead,

they want the larger baskets and increased customer loyalty. They want the manufacturer to drive the “pantry

loading” trip types in grocery and the “back-to-school” visits in mass merchandise.


As a result, the trade promotion programs need to change. In line with this thinking, McCormick, a major

manufacturer of spices, is teaming with grocery retailers to offer specialized spice/recipe grilling options next to

the protein aisles based on localized flavor profiles. Electronic coupons are offered through MyWebGrocer. The

coupons are then translated into specialized store-specific displays next to the butcher’s aisle. These more

advanced demand insights and packaged services are designed to drive foot traffic with larger baskets that

combine the purchase of a protein (like chicken or steak) with specialized spices to deliver a delectable

experience for the shopper. In this case, both McCormick and the retailer know that it is not about what goes

into the basket, but about what goes onto the table, that will drive repeat traffic. The secret is helping

customers to better use the product.

As Consumer Packaged Goods (CPG) and Food and Beverage companies automate their digital path to

purchase programs—automating the four moments of truth (at the kitchen table in the formation of the list, the

decision to put something into the cart through in-store programs, the automation of the purchase and the

collection of customer sentiment)—they have a new opportunity to partner with retailers on the redefinition of

the store.

Conclusion The role of the store in retailing has changed. It is no longer about an isolated shopping experience. Instead,

the store needs to be rethought as part of an integrated experience of selling goods and services.


Appendix In this section, we share the demographic information of survey respondents. The respondents answered the

surveys of their own free will. There was no exchange of currency. The only offer made to stimulate a response

was to share the survey results in the form of Open Content research at the end of the study.

The names of those that completed the surveys are held in confidence, but the demographics are shared to

help the readers of this report gain perspective on the respondents. The supporting demographics are found

below in figures A-C.

Figure A. Overview of the Respondent by Type of Retailer


Figure B. Role of the Respondent

Figure C. Working on Programs to Improve Store Operations


Other Related Reports Retail Mobility Published by Supply Chain Insights in July 2012 Supply Chain Metrics That Matter: A Focus on Retail Published by Supply Chain Insights in August 2012. Supply Chain Metrics That Matter: A Focus on Consumer Products Published by Supply Chain Insights in September 2012. Supply Chain Metrics That Matter: The Cash-to-Cash Cycle Published by Supply Chain Insights in November 2012. Supply Chain Metrics That Matter: A Focus on Brick & Mortar Retail Published by Supply Chain Insights in February 2013.

http://supplychaininsights.com/research-reports/retail-mobility-report/

http://supplychaininsights.com/supply-chain-metrics-that-matter-focus-on-retail/

http://www.supplychaininsights.com/supply-chain-metrics-that-matter-a-focus-on-consumer-products

http://supplychaininsights.com/supply-chain-metrics-that-matter-the-cash-to-cash-cycle/

http://supplychaininsights.com/supply-chain-metrics-that-matter-a-focus-on-brick-mortar-retail/


About Supply Chain Insights LLC Founded in February, 2012 by Lora Cecere, Supply Chain Insights LLC is focused on delivering independent, actionable and objective advice for supply chain leaders. If you need to know which practices and

technologies make the biggest difference to corporate performance, turn to us. We are a company dedicated to

this research. We help you understand supply chain trends, evolving technologies and which metrics matter.

About Lora Cecere Lora Cecere (twitter ID @lcecere) is the Founder of Supply Chain Insights LLC and the

author of popular enterprise software blog Supply Chain Shaman currently read by 5,000

supply chain professionals. Her book, Bricks Matter, (co-authored with Charlie Chase)

published on December 26, 2012; and her second book, Metrics That Matter, will publish in

2014.

With over nine years as a research analyst with AMR Research, Altimeter Group, and Gartner Group and now as a Founder of Supply Chain Insights, Lora understands supply

chain. She has worked with over 600 companies on their supply chain strategy and speaks at over 50

conferences a year on the evolution of supply chain processes and technologies. Her research is designed for

the early adopter seeking first mover advantage.

i 1 Corporate Annual Reports

http://supplychaininsights.com/

http://www.twitter.com/lcecere

http://www.supplychaininsights.com/

http://www.supplychainshaman.com/

http://www.bricksmatter.com/reviews/

The Role of the Store - 8 July 2013

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